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//•* C rontCoJ /y Cc&iMrit <nfl U’r+'I CC.J 

REPORT TO THE CONGRESS 



Savings Possible By Buying 
Automatic Data Processing 
Equipment Or By Leasing It 
From Commercial Leasing Firms 

B-7I48J 

Government Printing Office 


' 0/30 


BY THE COMPTROLLER GENERAL 
OF THE UNITED STATES 


NOV. 24,1970 








COMPTROLLER GENERAL OF THE UNITED STATES 
WASHINGTON. D.C. 20948 


y\ 


B- 114829 


To the President of the Senate and the 
Speaker of the House of Representatives 

This is our report on savings possible at the Government 
Printing Office by buying automatic data processing equipment 
or by leasing it from commercial leasing firms. 

Our review was made pursuant to the Budget and Ac¬ 
counting Act, 1921 (31 U.S.C. 53); the Accounting and Auditing 
Act of 1950 (31 U.S.C. 67); and the Legislative- Judiciary 
Appropriation Act, 1954 (44 U.S.C. 309). 

Copies of this report are being sent to the Director, 
Office of Management and Budget; the Public Printer; and 
the Chairman, Joint Committee on Printing. 



Comptroller General 
of the United States 






W" 
















































* 








■ * • '.V. 






































COMPTROLLER GENERAL ’S SAVINGS POSSIBLE BY BUYING AUTOMATIC DATA 

REPORT TO THE CONGRESS PROCESSING EQUIPMENT OR BY LEASING IT 

FROM COMMERCIAL LEASING FIRMS 
Government Printing Office B-114829 


DIGEST 


WHY THE REVIEW WAS MADE 


The Government Printing Office has been meeting its needs for automatic 
data processing (ADP) equipment by leasing it from the manufacturer. 

The General Accounting Office (GAO) made this review to determine whether 
there were more economical alternatives for acquiring such equipment and, 
if so, whether they had been considered by the Printing Office. 


FINDINGS AND CONCLUSIONS 

Although purchasing ADP equipment is often more economical than leasing, 
the Printing Office said purchasing was not feasible for it because of 
uncertainties as to its future equipment needs. GAO believes that, if 
purchase is not feasible, the Printing Office can still reduce rental 
costs by leasing its equipment from a commercial leasing firm rather than 
from the manufacturer. 

For instance, GAO estimates the Printing Office could have saved about 
$164,000 for a 1-year period, $363,000 for a 2-year period, and $1.2 mil¬ 
lion for a 5-year period if it had leased equipment from a commercial 
leasing firm similar to that it was leasing (or planned to lease) as of 
July 1, 1969. (See p. 10.) 

Additional savings may result if the Printing Office can find a means of 
forecasting its long-term ADP equipment requirements and thus make it 
practicable to purchase the equipment. (See p. 13.) 

In view of the financial advantages of leasing the equipment from commer¬ 
cial leasing firms or purchasing it if a sufficient retention period can 
be established, GAO believes that the continuation of the Government 
Printing Office's practice of leasing from the equipment manufacturer will 
result in additional costs and that steps should be taken to change this 
practice at the earliest practicable date. 


Tear Sheet 


NOV. 24,1970 






RECOMMENDATIONS OR SUGGESTIONS 


GAO is recommending to the Public Printer that: 

--Procedures be established to ensure that acquisitions of ADP equip¬ 
ment will be based on an adequate analysis of the merits of alterna¬ 
tive sources of supply. (See p. 17.) 

--ADP equipment requirements be reevaluated to determine whether rea¬ 
sonably accurate retention periods can be established for any of the 
ADP systems presently being leased from the manufacturer that would 
justify direct purchase of any of the equipment. (See p. 17.) 

--Lease terms and ADP equipment available from commercial leasing firms 
be fully explored with a view toward leasing the equipment at the most 
economical and advantageous terms obtainable when the estimated re¬ 
tention period is not sufficient to justify the direct purchase. (See 
p. 17.) 


AGENCY ACTIONS AND UNRESOLVED ISSUES 

The Government Printing Office told GAO that it had previously considered 
both purchasing equipment and leasing it from commercial leasing firms but 
that in most cases records were not retained showing the results of its 
evaluations. (See p. 6.) 

Government Printing Office officials said the feasibility of purchasing 
ADP equipment or leasing it from a commercial leasing firm would be fur¬ 
ther investigated. Also, the Printing Office will consider and adequately 
document all pertinent factors in connection with its future acquisition 
of ADP equipment. (See p. 16.) 


MATTERS FOR CONSIDERATION BY TEE CONGRESS 

GAO believes that this report will be of interest to the Congress because 
of the significant savings that can be effected by leasing ADP equipment 
from commercial leasing firms or purchasing the equipment if sufficient 
retention periods can be established by the Government Printing Office. 


2 






Contents 

Page 

DIGEST 1 

CHAPTER 

1 INTRODUCTION 3 

Government policy for the acquisition of 

ADP equipment 3 

2 ACQUISITION OF ADP EQUIPMENT 3Y GPO 6 

3 COST COMPARISONS 10 

Leasing equipment from commercial leas¬ 
ing firms 10 

Purchasing equipment from the manufac¬ 
turer 12 

Acquiring equipment by a combination of 

methods 13 

4 AGENCY ACTION, GAO CONCLUSIONS, AND RECOM¬ 
MENDATIONS 16 

Agency action 16 

Conclusions 17 

Recommendations to the Public Printer 17 

5 SCOPE OF REVIEW 19 

APPENDIX 

I Comparison of estimated cost of leasing ADP 

equipment from IBM to the estimated cost 
of leasing from a commercial leasing firm 
over a 5-year period based on rates in ef¬ 
fect on July 1, 1969 23 

II Comparison of estimated cost of purchasing 

ADP equipment from IBM to estimated cost 
of leasing from a commercial leasing firm 
over a 5-year period 24 




APPENDIX 


Page 


III Letter dated January 23, 1970, from the 

Public Printer, GPO, to the General Ac¬ 
counting Office 25 

IV Principal officials of the GPO responsible 
for the administration of the activities 
discussed in this report 27 

ABBREVIATIONS 

ADP automatic data processing 

GAO General Accounting Office 

GPO Government Printing Office 

GSA General Services Administration 

IBM International Business Machines Corporation 




COMPTROLLER GENERAL'S SAVINGS POSSIBLE BY BUYING AUTOMATIC DATA 

REPORT TO THE CONGRESS PROCESSING EQUIPMENT OR BY LEASING IT 

FROM COMMERCIAL LEASING FIRMS 
Government Printing Office B-l14829 


DIGEST 


WHY THE REVIEW WAS MADE 


The Government Printing Office has been meeting its needs for automatic 
data processing (ADP) equipment by leasing it from the manufacturer. 

The General Accounting Office (GAO) made this review to determine whether 
there were more economical alternatives for acquiring such equipment and, 
if so, whether they had been considered by the Printing Office. 


FINDINGS AND CONCLUSIONS 

Although purchasing ADP equipment is often more economical than leasing, 
the Printing Office said purchasing was not feasible for it because of 
uncertainties as to its future equipment needs. GAO believes that, if 
purchase is not feasible, the Printing Office can still reduce rental 
costs by leasing its equipment from a commercial leasing firm rather than 
from the manufacturer. 

For instance, GAO estimates the Printing Office could have saved about 
$164,000 for a 1-year period, $363,000 for a 2-year period, and $1.2 mil¬ 
lion for a 5-year period if it had leased equipment from a commercial 
leasing firm similar to that it was leasing (or planned to lease) as of 
July 1 , 1969. (See p. 10.) 

Additional savings may result if the Printing Office can find a means of 
forecasting its long-term ADP equipment requirements and thus make it 
practicable to purchase the equipment. (See p. 13.) 

In view of the financial advantages of leasing the equipment from commer¬ 
cial leasing firms or purchasing it if a sufficient retention period can 
be established, GAO believes that the continuation of the Government 
Printing Office's practice of leasing from the equipment manufacturer will 
result in additional costs and that steps should be taken to change this 
practice at the earliest practicable date. 


1 





RECOMMENDATIONS OR SUGGESTIONS 


GAO is recommending to the Public Printer that: 

—Procedures be established to ensure that acquisitions of ADP equip¬ 
ment will be based on an adequate analysis of the merits of alterna¬ 
tive sources of supply. (See p. 17.) 

--ADP equipment requirements be reevaluated to determine whether rea¬ 
sonably accurate retention periods can be established for any of the 
ADP systems presently being leased from the manufacturer that would 
justify direct purchase of any of the equipment. (See p. 17.) 

--Lease terms and ADP equipment available from commercial leasing firms 
be fully explored with a view toward leasing the equipment at the most 
economical and advantageous terms obtainable when the estimated re¬ 
tention period is not sufficient to justify the direct purchase. (See 
p. 17.) 


AGENCY ACTIONS AND UNRESOLVED ISSUES 

The Government Printing Office told GAO that it had previously considered 
both purchasing equipment and leasing it from commercial leasing firms but 
that in most cases records were not retained showing the results of its 
evaluations. (See p. 6.) 

Government Printing Office officials said the feasibility of purchasing 
ADP equipment or leasing it from a commercial leasing firm would be fur¬ 
ther investigated. Also, the Printing Office will consider and adequately 
document all pertinent factors in connection with its future acquisition 
of ADP equipment. (See p. 16.) 


MATTERS FOR CONSIDERATION BY THE CONGRESS 

GAO believes that this report will be of interest to the Congress because 
of the significant savings that can be effected by leasing ADP equipment 
from commercial leasing firms or purchasing the equipment if sufficient 
retention periods can be established by the Government Printing Office. 


2 






CHAPTER 1 


INTRODUCTION 

The General Accounting Office has examined into the 
acquisition of automatic data processing equipment by the 
Government Printing Office (GPO), Washington, D.C. In mak¬ 
ing our examination, we compared the cost under GPO's exist¬ 
ing practice of leasing ADP equipment from the manufacturer 
with the cost of (1) leasing equipment from a leasing firm 
and (2) purchasing equipment from the manufacturer. The 
scope of our review is described on page 19. 

GPO is responsible for printing and binding work or¬ 
dered by the Congress and the individual departments, in¬ 
dependent establishments, and agencies of the Federal Govern¬ 
ment. In addition, GPO prints, for sale to the public, doc¬ 
uments of general interest that are not confidential in na¬ 
ture. 


In providing these services, GPO uses ADP equipment to 
process information for accounting and reporting require¬ 
ments and to prepare information for electronic photocompo¬ 
sition. The ADP equipment in use at GPO consists of three 
IBM 360 computer systems leased from the manufacturer, In¬ 
ternational Business Machines Corporation (IBM). 

A listing of the principal officials of GPO responsible 
for the administration of the activities discussed in this 
report is included as appendix IV. 

GOVERNMENT POLICY FOR THE 
ACQUISITION OF ADP EQUIPMENT 

The General Services Administration (GSA), through Fed¬ 
eral Property Management Regulations, and the Office of 
Management and Budget, through circulars and directives, 
have identified three methods of acquiring ADP equipment-- 
purchase from the manufacturer, lease from the manufacturer, 
and lease from a commercial leasing firm other than the 
manufacturer. The estimated cost of each of these methods 
is discussed in chapter 3. 


3 






GSA is responsible by law (40 U.S.C. 759) for coordi¬ 
nating and providing for the economic purchase, lease, and 
maintenance of ADP equipment obtained by Federal agencies. 

In accordance with this responsibility, GSA has issued sev¬ 
eral bulletins advising the heads of Federal agencies of the 
desirability of considering leasing firms as a source for 
ADP equipment. GSA bulletin, Federal Property Management 
Regulation A-9, dated March 10, 1966, stated in an attach¬ 
ment that several leasing firms had offered short-term 
leasing proposals to the Government, which would produce 
savings of 10 to 50 percent of the IBM lease rates on simi¬ 
lar ADP equipment. This bulletin stated also that the rights 
granted to the Government under these proposals would be at 
least equal to, and in some instances better than, those 
which were currently offered by IBM, 

Subsequently, GSA bulletin, Federal Property Management 
Regulation E-27, dated September 15, 1966, advised the heads 
of Federal agencies that GSA was in the process of develop¬ 
ing contract terms and specific guidelines to aid Federal 
agencies in dealing with leasing firms. This bulletin 
stated that, pending the accomplishment of these actions by 
GSA and after giving due consideration to the feasibility 
of purchasing ADP equipment, each Federal agency should 
proceed with the development of arrangements with leasing 
firms where it has been determined to be in the best inter¬ 
ests of the Government. 

Bureau of the Budget Circular No, A-54, as revised, 
dated June 27, 1967, requires Federal agencies to consider 
commercial leasing firms as a source of supply for ADP equip¬ 
ment. This requirement, together with the policies and 
guidance stated in applicable Bureau of the Budget direc¬ 
tives, was extended to legislative branch agencies, such as 
GPO by Federal Property Management Regulation E-56, dated 
January 1969. Circular No. A-54, as revised, advises Federal 
agencies that most commercially available equipment can be 
acquired by purchase or lease from the equipment manufac - 
turer or by lease from a commercial leasing firm. Guide¬ 
lines for agency self-appraisal of practices in the manage¬ 
ment of ADP equipment are provided in Bureau of the Budget 
Circular No. A-61, dated August 3, 1963. 


4 


Under the existing policy, as stated in Bureau of the 
Budget Circulars Nos. A-54 and A-61, one of the requirements 
for purchasing ADP equipment is that the acquiring agency 
determined that it will retain the equipment beyond the 
break-even point (point in time when the accumulated rental 
costs equal, and thereafter exceed, the purchase price plus 
accumulated maintenance costs). Circular No. A-54 requires 
that each Federal agency give careful consideration to the 
relative merits of each potential source of supply and ac¬ 
quire its ADP equipment from the source which offers the 
greatest advantage to the Government. It requires also 
that the basis for the selection of the method of acquisi¬ 
tion be adequately documented. 




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CHAPTER 2 


ACQUISITION OF ADP EQUIPMENT BY GPO 

GPO began its acquisition of the IBM 360 computer sys¬ 
tems in April 1964 under a letter of intent to IBM to lease 
one 360 system, on the basis of the results of a GPO tech¬ 
nical review and a decision to replace earlier model com¬ 
puters being leased from IBM. Although the letter of intent 
specified an IBM 360 model 50 (360/50) system, GPO accepted 
an IBM 360 model 40 (360/40) system because of its earlier 
availability. The major components of this system were 
installed at GPO by IBM in October 1965. 

GPO's order for the 360/50 system remained in effect. 

In June 1967 the major components of this system were in¬ 
stalled. 

GPO’s decision to acquire the 360/40 and 360/50 sys¬ 
tems was based upon its technical review made early in 1964 
and updated in 1965 and 1966. Both systems were leased 
from IBM under the standard Government year-to-year lease 
with the usual purchase option. We were advised by GPO of¬ 
ficials that the feasibility ol*/purchasing the equipment had 
been studied and that leasing from a commercial leasing 
firm had been considered; however, GPO officials were unable 
to furnish us with any records of such a study. 

In June 1967 GPO decided to acquire another 360/50 sys¬ 
tem from the manufacturer. The major components for this 
system were installed in August 1969. For this acquisition, 
t GPO provided us with a record of a study in which it com¬ 
pared the cost of leasing the system from IBM ; with the cost 
of purchasing it from IBM. The study, which covered a 
2-year period, showed that the cost of purchasing exceeded 
the cost of leasing. GPO based its comparison on the 
2-year period because it believed th^t the uncertainty as 
to the^scope of its future data processing applications 
made it imprudent to make firm commitments for a longer pe¬ 
riod. GPO officials advised us thafrleasing from a commer¬ 
cial leasing firm had been considered, but they were unable 
to locate any supporting records. Our review of GPO’s 
records revealed no evidence as to extent of the 


6 




consideration given to leasing from a commercial leasing 
firm. 


GPO's inability to accurately forecast its long-range 
ADP requirements, together with the results of its 2-year 
purchase-versus-lease cost comparison appear to be the ma¬ 
jor reasons for GPO's decision to lease on a year-to-year 
basis the 360/50 system installed in August 1969. Although 
estimates of future ADP requirements were prepared by a 
committee established by GPO for that purpose, GPO manage¬ 
ment considered the estimates inadequate as a basis for pur¬ 
chasing the equipment, because possible changes in the quan¬ 
tity and type of work which would be processed in the future 
could require modification or replacement of the equipment. 
GPO officials advised us that they could not predict when 
these changes would occur. 

At the completion of our fieldwork, GPO was leasing the 
three 360 computer systems from IBM at an annual lease cost 
of $898,308. 

It was not clear from GPO's records or from our dis¬ 
cussions with GPO officials why formal records of lease- 
versus-purchase cost comparisons were not made and kept in 
connection with the decisions to lease the first two 360 
systems. It is true that, at the time the decisions were 
made, it was not mandatory that legislative agencies prepare 
and document lease-versus-purchase cost comparisons in reach¬ 
ing decisions as to the method of acquiring computer systems. 
In this respect, the requirements contained in Bureau of the 
Budget Circulars Nos. A-54 and A-61 were not mandatory for 
legislative branch agencies until January 1969. Nonetheless, 
since the circulars indicated that significant savings could 
be obtained through purchase, we would have expected that 
such documentation would have been prepared and kept if for 
no reason other than to support the decisions to spend 
large sums on leasing when purchasing was indicated to be 
a more economical alternative in many cases. 

In commenting on why the equipment was neither purchased 
nor leased from a commercial leasing firm, officials of 
GPO told us that they: 


7 


"*** could not reasonably predict the workload 
for electronic photocomposition; the pace and 
scope of other computer applications; the avail¬ 
ability of space and manpower; the effect of ad¬ 
vances in computer technology; the future needs 
for present operating requirements and limitations; 
and past experience involving a rapid turnover 
of computer equipment; and in view of this, pur¬ 
chase or long-term leasing from a commercial leas¬ 
ing firm were not considered to be feasible." 

In addition, GPO officials stated that they: 

"*** were fearful of the speculative and transi¬ 
tory nature of computer leasing firms, and were 
of the opinion that possible bankruptcy, policy 
changes, and failures to meet delivery schedules, 
and/or a failure to sustain a high degree of sys¬ 
tems engineering, educational material, and around- 
the-clock maintenance and back-up support might 
have a serious and adverse effect on vital computer 
operations." 

GPO officials told us also that, in the event of an 
untimely bankruptcy of a commercial leasing firm, there 
would be some question as to GPO ’s right and the possibility 
that GPO would be forced to take undesirable alternative 
courses of action which could interfere with its operations. 

In our opinion, GPO’s inability to predict the elec¬ 
tronic photocomposition workload, together with the related 
uncertainties as to other computer applications, space, man¬ 
power, and computer technology, may be justification for not' 
purchasing ADP equipment or entering into a long-term lease 
agreement but could hardly obviate the need to determine 
whether a short-term leasing arrangement from commercial 
leasing firms was available and feasible. Since short-term 
leases are available and will allow GPO to reduce its rental 
costs significantly (see p. 10), it is our view that GPO's 
inability to predict workload requirements is not relevant 
to a decision to lease this equipment from a commercial 
leasing firm. The other areas, such as computer applica¬ 
tions, space, manpower, and technology, seem to be of equal 


8 


concern whether ADP equipment is leased from the manufac¬ 
turer or from a commercial leasing firm. 

With regard to the concern expressed by GPO officials 
as to "the speculative and transitory nature" of computer 
leasing firms, it should be noted that, in the event of fi¬ 
nancial difficulties of the lessor, the Government as les¬ 
see would have a contractual right to use the equipment 
during the period of the lease, including the period covered 
by any significant renewal options, regardless of whether 
the leasing firm became bankrupt or otherwise ceased opera¬ 
tions . 

Systems engineering, educational material, and other 
backup or technical support would have been available from 
IBM without charge prior to June 23, 1969, under leasing 
arrangements with a commercial leasing firm, provided that 
GPO was the first lessee of the specific items of equipment 
covered by the lease. Because of a policy change by IBM 
on June 23, 1969, the matter of technical support will not 
be a factor subsequent to that date, because all users of 
leased equipment will be charged for technical-support ser¬ 
vices . 

Maintenance services by the manufacturer are available 
for equipment leased from commercial leasing firms, and 
the maintenance cost for the 40-, 75-, and 100-percent levels 
of utilization have been included in our computations of 
estimated savings. Round-the-clock maintenance for equip¬ 
ment acquired from commercial leasing firms is available, 
if necessary, at extra cost or can be accomplished by spe¬ 
cific maintenance service calls, as needed, at times other 
than during the normal one-shift working hours. 

We noted that the practice of leasing ADP equipment 
from commercial leasing firms had precedent in that certain 
other Government agencies had acquired ADP equipment by this 
method. Furthermore, this method has the sanction of GSA 
and the Office of Management and Budget, both of which re¬ 
quire documentation by the agency supporting its selection 
of the method of acquisition. 


9 


CHAPTER 3 


COST COMPARISONS 


We estimated that GPO's future rental costs could be 
reduced by about $164,000 over a 1-year period, about 
$363,000 over a 2-year period, and about $1.2 million over 
a 5-year period, if ADP equipment similar to that which GPO 
was leasing or planning to lease as of July 1, 1969, were 
leased from a commercial leasing firm. In addition, we 
observed that, although the potential savings could be even 
greater if the equipment were purchased from the manufac¬ 
turer or acquired by a combination of leasing and purchasing, 
there was no assurance that these additional savings would 
be realized because GPO had been unable to establish long¬ 
term usage requirements for the equipment. 

LEASING EQUIPMENT FROM 

COMMERCIAL LEASING FIRMS 


Our comparison of the cost to lease ADP equipment from 
IBM with the cost to lease from commercial leasing firms 
showed that GPO could reduce its future expenditures sub¬ 
stantially if equipment comparable to that which GPO was 
leasing or planning to lease as of July 1, 1969, were 
leased from a commercial leasing firm. Our comparison, 
based on an equipment utilization rate of 40 percent of 
available operational time, showed that savings would range 
from about $164,000 if the equipment were retained for only 
1 year to about $1.2 million if it were retained for 5 years, 
as shown in the following tabulation. 




Cumulative costs and potential savings 
based upon 40-percent utilization 


First 

Second 

Third 

Fourth 

Fifth year 


year 

year 

year 

year 

(note a) 

Cost to lease from IBM 
Cost to lease from com¬ 
mercial leasing firm 

$898,308 

$1,796,616 

$2,694,924 

$3,593,232 

$4,491,540 

(note b) 

734.661 

1.433.390 

2.096.186 

2.723.050 

3.313.982 

Potential savings 

a. .. 

$163,647 

$ 363.226 

$ 598.738 

$ 870.182 

$1,177,558 


3 Appendix I shows lease costs for a 5-year period for each of the three systems. 


Based on most favorable lease terms quoted by one of the three commercial leasing 
firms consulted during our review. 


10 





















Regarding equipment utilization, there is an estimated 
maximum of 720 hours a month (30 days x 24 hours) of avail¬ 
able computer time. During normal operations, computer time 
is used for (1) machine processing of data and testing of 
programs, (2) setting up and preparing machines for data 
processing operations, and (3) preventive and remedial 
maintenance. On the basis of GPO's 1968 usage data, we es¬ 
timate that the maximum available machine processing time 
for the equipment in use at the GPO is about 434 hours a 
month. 

The calculation of costs and potential savings in the 
preceding tabulation is based on the minimum IBM rental 
charges which allow for machine processing time of 176 hours 
a month. This amounts to about 40 percent of the 434 hours 
estimated to be available at GPO. Although GPO cannot pre¬ 
dict the amount of machine processing time required for fu¬ 
ture operations, prior usage rates and increasing require¬ 
ments indicate that machine utilization will probably ex¬ 
ceed the 40-percent rate used in this calculation. 

Rental charges for ADP equipment leased from IBM in¬ 
crease as equipment usage increases, whereas the rental 
charges by the commercial leasing firm provide for un¬ 
limited usage. Accordingly, the potential savings to GPO 
associated with leasing ADP equipment from a commercial 
leasing firm become greater as the rate of utilization of 
the equipment increases beyond 40 percent. For example, if 
like equipment, leased from a commercial leasing firm, were 
retained for 5 years and utilized at a rate of 75 percent 
(326 hours), the potential savings would increase to 
$1.5 million; if the equipment were utilized at a rate of 
100 percent (434 hours), the potential savings would in¬ 
crease to $1.6 million. 

An official of a commercial leasing firm advised us 
that his firm could provide IBM 360 computer systems simi¬ 
lar to those used by GPO for an initial lease period of 
1 year. Upon expiration of the lease, the Government would 
have the option of renewing the lease for another year or 
returning the equipment upon 30 to 60 days’ notice to the 
commercial leasing firm. The same arrangement would con¬ 
tinue from year to year. We were advised also that the 


11 


lease could include an option to purchase the equipment at 
terms to be established during lease negotiations. 

Maintenance services for equipment acquired from the 
commercial leasing firm would be provided by IBM under a 
separate contractual agreement. The cost of these services 
has been included in our calculations. From January 1, 
1970, IBM’s technical support-consisting of assistance in 
the installation and use of IBM data processing equipment, 
use of IBM-developed programs, and classroom training for 
GPO employees—for IBM equipment costs the same regardless 
of whether the equipment is leased from IBM or from a com¬ 
mercial leasing firm. Prior to January 1, 1970, technical 
support for equipment rented from IBM was available at no 
charge. 

PURCHASING EQUIPMENT FROM THE MANUFACTURER 

We compared the cost of leasing versus purchasing for 
each of the three ADP systems over a 5-year period which 
began July 1, 1969. We based this comparison on the cost 
of leasing the systems from a commercial leasing firm since 
that cost was considerably less than the cost of leasing 
from IBM. (See p. 10.) Our comparison showed that the 
break-even point for the IBM 360/40 system would not be 
reached until 3 years and 11 months after purchase. Break¬ 
even points for the first and second IBM 360/50 systems re¬ 
quire longer periods, 4 years and 5 months and 7 years and 
1 month, respectively. The extent of equipment utilization 
was not a factor to this comparison because the commercial 
leasing firm rentals remained fixed regardless of utiliza¬ 
tion. Maintenance costs for increased utilization would be 
the same under both of the above methods of acquisition. 

Our calculations are summarized below. 


Period 

First year 
Second year 
Third year 
Fourth year 
Fifth year (note a) 
Estimated break-even point 
(after July 1, 1969) 


Estimated cumulative savings or additional 
leased from a commercial leasine firm rather 

loss 

than 

(-) if 
purchased 

IBM 360/40 

IBM 360/50 

IBM 360/50 


Total 

$ 73,037 

$130,775 

$463,290 


$667,102 

64,501 

134,239 

482,806 


681,546 

43,227 

101,821 

464,066 


609,114 

-6,056 

47,498 

420,860 


462,302 

-68,077 

-56,117 

326,389 


202,195 

3 yrs.. 

4 yrs.. 

7 yrs., 


5 yrs.. 

11 mo. 

5 mo. 

1 mo. 


7 mo. 


Details are included as appendix II. 


12 










This analysis shows that costs to lease all three sys¬ 
tems from a commercial leasing firm for the 5-year period 
are substantially less than the cost to purchase the three 
systems. This financial advantage, however, decreases 
rapidly as each system nears its respective break-even 
point. 

ACQUIRING EQUIPMENT BY A 

COMBINATION OF METHODS 


Our review showed that GPO could significantly reduce 
its costs by either purchasing or leasing from a commercial 
leasing firm and retaining for 5 years ADP equipment com¬ 
parable to that which GPO was leasing or planning to lease 
from IBM as of July 1, 1969. The purchase alternative of¬ 
fers the greatest savings provided the equipment is re¬ 
tained beyond the break-even point. However, if the equip¬ 
ment is disposed of prior to the break-even point GPO could 
incur additional costs. Leasing the equipment from a com¬ 
mercial leasing firm would reduce GPO's costs even if the 
equipment is retained for only 1 year. 

Since the break-even points of the individual computer 
systems vary from about 4 years to about 7 years, it may be 
that the most economical method of acquisition is a combina¬ 
tion of the alternative methods discussed in this report. 

For example, if the three ADP systems in operation during 
1969 were to be retained for 5 years, the most economical 
method of acquisition would have been to purchase the first 
two systems and lease the third system from a commercial 
leasing firm. We estimate that GPO, by using this combina¬ 
tion of methods of acquisition, could reduce its costs by 
$1.3 million, as shown below. 


Estimated cumulative savings for a 5-year period 
based on rates in effect on July 1, 1969 


System 

Lease from commercial 
leasing firm 

Purchase 

from IBM 

Most favorab 
method 

360/40 

$ 268,285 

$336,362 

$ 336,362 

360/50 

459,071 

515,187 

515,187 

360/50 

450.202 

123,814 

450,202 

Total 

$1,177,558 

$975,363 

$1,301,751 


13 


















Although the above comparison shows that substantial 
savings could have been effected over a 5-year period by 
using a combination of acquisition methods, the financial 
advantages of purchasing ADP equipment are dependent upon 
the retention of the equipment beyond the break-even point. 
As previously noted, however, GPO believes that it cannot 
predict its long-term equipment requirements. 

The relationship of break-even point to cost is further 
illustrated in the following graphic comparison of the costs 
which would be incurred under each method of acquisition 
for the three systems combined. This graph shows the short¬ 
term financial advantage of leasing from a commercial leas¬ 
ing firm and the long-term advantage of purchasing. It 
shows also that, regardless of the anticipated retention 
period, leasing from the equipment manufacturer is not the 
most economical method of acquisition. 


14 


COMPARISON OF THE ESTIMATED COST OF ALTERNATIVE METHODS OF 
ACQUIRING AUTOMATIC DATA PROCESSING EQUIPMENT 


COST IN MILLIONS $ 



0 1 2 3 4 5 6 7 


YEARS OF ANTICIPATED RETENTION FROM JULY 1 1969 


15 









CHAPTER 4 


AGENCY ACTION, GAO CONCLUSIONS % AND RECOMMENDATIONS 

AGENCY ACTION 


Daring our review, GPO contacted three computer¬ 
leasing firms by telephone and requested information on 
their leasing practices* GPO officials advised us that no 
further action was taken because the leasing firms con¬ 
tacted either did not respond to GPO's request for infor¬ 
mation or could not meet its requirements. The leasing 
firms contacted did not, however, include one of the major 
firms which had advised us of its interest in leasing ADP 
equipment to Government agencies. 

Upon further discussion of this matter with GPO offi¬ 
cials, we were advised that they would give further consid¬ 
eration to the feasibility of acquiring ADP equipment from 
a commercial leasing firm. We were advised also that GPO 
would consider purchasing ADP equipment whenever predict¬ 
able retention periods were long enough to make such pur¬ 
chases practicable. In response to our request for comments 
on the draft of this report, the Public Printer advised us 
that GPO would consider and adequately document all perti¬ 
nent factors in connection with its future acquisition of 
ADP equipment. (See app. III.) At his suggestion, we dis¬ 
cussed the content of the draft report with the Comptroller 
of GPO and made appropriate revisions to the report, includ¬ 
ing verbatim statements of GPO's objections to the use of 
commercial leasing firms. (See p. 8.) 

The Public Printer also noted that the repeal of the 
7-percent investment credit and the lowering of basic rental 
prices by IBM had left the leasing market in a state of 
mild confusion. We believe that these items are not of 
sufficient significance to nullify the estimated savings. 

Our computations are based upon the leasing of equipment 
from the commercial leasing firm's inventory on which the 
investment credit benefits probably had been realized at 
the time of acquisition. The reduction in IBM's lease 
rates for fiscal year 1970 amounted to 3 percent, which is 
not large enough to appreciably reduce the estimated savings. 


16 





CONCLUSIONS 


We believe that the short-term lease arrangements cur¬ 
rently offered by commercial leasing firms offer GPO the op¬ 
portunity for substantially reducing its cost of leasing ADP 
equipment while retaining the flexibility to upgrade the 
equipment. In addition, although our computations indicate 
that the potential savings would be greater if the two com¬ 
puter systems obtained in October 1965 and June 1967 had 
been purchased on July 1, 1969, and retained for at least 
5 years, this alternative method of procurement does not 
appear to be feasible unless GPO finds that it has a long¬ 
term requirement for this equipment. In view of the finan¬ 
cial advantages of leasing from commercial leasing firms or 
purchasing the equipment if a sufficient retention period 
can be established, we believe that the continuation of 
GPO's practice of leasing from the equipment manufacturer 
will result in additional costs and that steps should be 
taken to change this practice at the earliest practicable 
date. 


Any change of ADP equipment at GPO would require care¬ 
ful planning and tight scheduling to minimize the effect of 
such a changeover upon operations. We believe that this 
could be accomplished effectively by GPO with the coopera¬ 
tion of the equipment manufacturer and commercial leasing 
firms. 

RECOMMENDATIONS TO THE PUBLIC PRINTER 

We recommend that the Public Printer establish internal 
procedures to ensure that acquisitions of ADP equipment, by 
purchase, new lease, or renewals of existing lease, will be 
based on an adequate analysis of the relative merits of all 
alternative sources of supply. We recommend also that, re¬ 
garding the ADP equipment which was being leased by GPO at 
the time of our review, anticipated requirements be reeval¬ 
uated to determine whether reasonably accurate retention 
periods can be established that will justify direct pur¬ 
chase of any of the equipment. We recommend further that, 
for the ADP equipment for which direct purchase is not found 
to be feasible, the lease terms and ADP equipment available 
from commercial leasing firms be fully explored with a view 
toward leasing the equipment at the most economical and 


17 




advantageous terms obtainable. We also suggest that appro¬ 
priate consideration be given to recent improvements in 
computer equipment produced by various manufacturers. 


18 


CHAPTER 5 


SCOPE OF REVIEW 


Our review was directed toward an evaluation of the 
feasibility and cost of acquiring ADP equipment by purchase 
or lease from the manufacturer or by lease from a commercial 
leasing firm. We examined statements of policy and guid¬ 
ance issued to Federal agencies by the Office of Management 
and Budget and GSA for the acquisition of ADP equipment. In 
addition, we examined records relevant to GPO's acquisition 
and operation of ADP equipment and held discussions with 
officials of GPO, IBM, and three commercial leasing firms. 

We also obtained cost estimates from the commercial leasing 
firms and compared the costs from the most favorable esti¬ 
mate with the costs that would be incurred by GPO in pur¬ 
chasing or leasing ADP equipment from the manufacturer. 


I 


19 



























































APPENDIXES 


21 









appendix I 


COMPARISON OF ESTIMATED COST OF LEASING ADP EQUIPMENT 
FROM IBM TO THE ESTIMATED COST OF LEASING 
FROM A COMMERCIAL LEASING FIRM 

OVER A 5-YEAR PERIOD BASED ON RATES IN EFFECT ON JULY 1, 1969 

(notes a and b) 


Computer system 



IBM 360/40 

IBM 360/50 

IBM 360/50 

Total 

Cost to lease from 
IBM (note c) 

$1,030,440 

$1,753,260 

$1,707,840 

$4,491,540 

Cost to lease from 
a leasing firm 
(note d) 

762.155 

1.294.189 

1.257.638 

3.313.982 

Savings if leased 
from a leasing 
firm (note e) 

$ 268.285 

$ 459.071 

$ 450.202 

$1.177.558 


£ 

Cost computations are based on equipment utilization of 176 hours a 
month covered by the minimum IBM rental charges, which is equivalent 
to 40 percent of available machine processing time. 


Certain components for which IBM charges a basic annual rental of 
$13,920 (1.5 percent of the total rentals) are not available from 
the commercial leasing firm and are not included in this comparison. 


c Costs are based on the rates for equipment rental and maintenance 
cited in the fiscal year 1969 Authorized Federal Supply Schedule 
Price List Contract GS-00S-76158 under which GPO leased the equip¬ 
ment. 


^Costs, including estimated IBM maintenance charges, are based on 
information obtained from a commercial leasing firm. 


^e computed the estimated savings on the basis of the present value 
method and found no significant difference in the results. 


23 

















APPENDIX II 


COMPARISON OF ESTIMATED COST OF PURCHASING ADP EQUIPMENT 
FROM IBM TO ESTIMATED COST OF LEASING FROM A COMMERCIAL LEASING FIRM 

OVER A 5-YEAR PERIOD (note a) 


Purchase price at July 1, 1969 (note b) 

Interest on purchase price to June 30, 1974 
(note c) 

Maintenance costs to June 30, 1974 (note d) 
Total purchase costs 

Less total estimated rental costs to 
June 30, 1974 (note e) 

Savings or loss(—) if acquired from a 

commercial leasing firm exclusive of es¬ 
timated residual value at June 30, 1974 

Less estimated residual value at June 30, 
1974 (note f) 

Savings or loss(—) if acquired from a com¬ 
mercial leasing firm (note g) 


Computer system 


IBM 360/40 

IBM 360/50 

IBM 360/50 

Total 

$567,665 

$1,016,572 

$1,308,120 

$2,892,357 

117,007 

71.760 

209,259 

119.505 

267,170 

113.385 

593,436 

304.650 

756,432 

1,345,336 

1,688,675 

3,790,443 

762.155 

1.294.189 

1.257.638 

3.313.982 

-5,723 

51,147 

431,037 

476,461 

62.354 

107.264 

104.648 

274.266 

$-68,077 

$ -56.117 

$ 326.389 

$ 202.195 


a Certain components having an estimated purchase price of $37,668 (1.3 percent of all 
equipment) are not available from the commercial leasing firm and have been excluded from 
the cost comparisons. 

^Purchase price is the gross purchase price shown in the fiscal year 1969 Authorized Fed¬ 
eral Supply Schedule Price List Contract GS-00S-76158 less estimated credits for the 
rentals paid from the date of installation to June 30, 1969. 


c 

Interest is a cost which is related to all Government expenditures. In our calculations, 
we have used the average yield (6 percent) of Treasury obligations with approximately 
5 years remaining to maturity as of February 1969—Bureau of the Budget Circular No. A-54, 
revised. 


Maintenance costs are based on IBM prime-shift maintenance charges as shown in fiscal year 
1969 Authorized Federal Supply Schedule Price List Contract GS-00S-76158. 


6 

Estimated rental costs, including estimated IBM maintenance charges, were furnished to us 
by a commercial leasing firm. 

^Estimated residual values at June 30, 1974, were obtained from a broker of used ADP equip¬ 
ment. 

a 

We also computed the estimated savings on the basis of the present value method and found 
no significant difference in the results. 


24 























APPENDIX III 
Page 1 



OFFICE OF THE 
PUBLIC PRINTER 


UNITED STATES GOVERNMENT PRINTING OFFICE 

WASHINGTON. D.C. 20401 


January 23, 1970 


Mr. Irvine M. Crawford, 

Assistant Director 
Civil Division 

U.S. General Accounting Office 
Washington, D. C. 20548 

Dear Mr. Crawford: 

Reference is made to your letter of December 12, 1969, forwarding for 
review and comment a copy of your proposed report to the Congress on 
the opportunity to reduce expenditures at the Government Printing 
Office by acquiring automatic data processing equipment from commer¬ 
cial leasing firms. 

The major portion of the report is devoted to a recitation of the past 
policies followed by this Office in the acquisition of automatic data 
processing equipment. Some of this material is inaccurate and I sug¬ 
gest that you meet with our Comptroller to resolve those areas. He 
will be happy to meet with you at your convenience. (See GAO note.) 

The main thrust of your report, however, concerns the future actions 
of this Office regarding the acquisition of automatic data processing 
equipment and recommends that the Public Printer: 

1. Establish internal procedures requiring that all future 
acquisitions of ADP equipment be based on an adequate 
analysis of the relative merits of all sources of supply 
including commercial leasing firms. 

2. Reevaluate the future ADP equipment requirements to de¬ 
termine if reasonably accurate retention periods can be 
established to justify direct purchase of the equipment 
presently installed at GPO. 

3. Fully explore the lease terms and conditions currently 
offered by commercial leasing firms with a view toward 
using this method to acquire ADP equipment for which the 
estimated retention period is insufficient to justify 
purchase. 

GAO note: Our representatives met with the Comptroller and 
appropriate changes were made to the report. 


Keep Freedom in Your Future With U. S. Savings Bonds 



25 



APPENDIX III 
Page 2 


This Office, in general, followed the course of action outlined in your 
recommendations, although I must admit that the degree of formality and 
documentation which your Office generally expects has either been inad¬ 
equate or missing. Steps have been .taken to correct this situation and 
all future decisions concerning the acquisition of automatic data pro¬ 
cessing equipment will be adequately documented. 

As you know, the repeal of the seven percent investment credit, the 
lwering of basic rental prices by I.B.H. together with separate charges 
for support services, and other‘factors have left the leasing market in 
a state of mild confusion. We will, however, follow these developments 
closely and consider and adequately document all pertinent factors in 
connection with our acquisitions of automatic data processing equipment. 

Thank you for allowing us to comment on your draft report. 


Sincerely yours. 



JAMES L. HARRISON 
Public Printer 


26 


APPENDIX IV 


PRINCIPAL OFFICIALS OF 

THE GPO RESPONSIBLE FOR THE ADMINISTRATION OF 
THE ACTIVITIES DISCUSSED IN THIS REPORT 


Tenure of office 

From To 

PUBLIC PRINTER: 


A. N. Spence 

Apr. 

1970 

Present 

James L. Harrison 

Mar. 

1961 

Mar. 1970 

DEPUTY PUBLIC PRINTER: 

James W. Tew 

Nov. 

1969 

Present 

Harry D. Merold 

Mar. 

1961 

Oct. 1969 

ADMINISTRATIVE ASSISTANT TO 

THE PUBLIC PRINTER: 

Harry J. Humphrey 

Jan. 

1966 

Present 

Felix E. Cristofane 

Mar. 

1961 

Dec. 1965 

COMPTROLLER: 

Walter C. DeVaughn 

May 

1968 

Present 

Earl M. Cragg 

Jan. 

1967 

Apr. 1968 

Frank Higginbotham 

Apr. 

1961 

Jan. 1967 


U.S. GAO Wash., D.C. 


27 










































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